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Inherited IRA Rules Blow Up With New SECURE Act - YouTube
Channel: True North Retirement
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Okay. Guess what? The secure act,
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it just blew the rules
around stretch IRAs,
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otherwise known as inherited
IRAs. Absolutely insane.
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So the SECURE Act is this massive piece
of legislation and it has provisions in
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it that go everywhere from, you know,
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paying off your student loans using
five 29 funds to what I'm talking about
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today, which is the most
impactful in my opinion.
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It's the provision that's going to pay
for all the other things because it
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brings in 15 point $7 billion in revenue
to the treasury over the next 10 years.
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Oh, Whoa.
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Hi there. My name is Ashley Micciche,
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I'm the CEO of True North Retirement
Advisors where we specialize in retirement
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and exit planning for
business owners. Okay,
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so let's take a step back here and
talk about the old rule with stretch or
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inherited IRAs and the new
rule under the SECURE Act.
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Prior to 2020,
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if you inherited an IRA from your parents,
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you in most cases would have been
able to take those distributions.
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So you're required to
take money out every year.
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But in a lot of cases you could
do that over your remaining life.
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So if you inherited this money when you
were say 55 and you live to be 85 that's
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30 years that you can spread out the
distributions and more importantly,
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spread out the taxes because every dollar
that you pull out of an IRA account is
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subject to tax.
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So what happens with the stretch IRA is
instead of taking it out over 30 years,
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let's say you now have a cap of 10 years,
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if you are a beneficiary
to take that money out.
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Now there's some exceptions to this
rule, but in general, most people,
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you know you're the account owner
and you're married. When you die,
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it goes to your spouse and then
response dies. It goes to your kids.
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That's how most people have their IRAs
set up. And if that's the case for you,
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then this is almost certainly
going to apply in your situation.
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Here's the problem though.
Let's say that when you die,
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you have $1 million in your IRA.
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That gets split two ways
between both of your kids.
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So they each have half a million dollars.
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Each of those beneficiaries their income
is going to jump by $50,000 each and
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every year for the next 10 years
if they do that full stretch IRA.
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The other issue with this is that when
most people inherit money they inherit in
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their 50s and their sixties,
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these are often the peak earning years.
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So when your income is already as high
as it's going to be in your working
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career, for the most part,
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you're adding on sizable
retirement required distributions
from mom or dad's IRA
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on top of that.
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And it can wreak havoc because it
throws you into all new tax brackets.
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And that money that your parents work
so hard or if you're watching this and
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you're the account owner,
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the money that you work so hard for could
potentially be subject to like half of
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it could go to taxes because if your
kids are in a higher tax bracket,
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it just bumps them up even more.
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So what does this have to
do with the Roth? Well,
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the Roth's just got a really a lot more
attractive because when you put money
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into a Roth,
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you're taxed on it that year so you
don't get the tax benefit on the
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contributions, then it
grows tax free from there.
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And then when you pull the money out,
whether it's you or your beneficiaries,
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that money is not taxed.
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So there's this unique opportunity now
where if you weren't already contributing
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to a Roth,
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you may want to look closely
at that because the more
money you can get into the
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Roth and out of the
traditional IRA, the better.
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And there's a couple of ways you can
do that. One is through conversions.
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So you can take money that you already
have an existing IRA or 401k account and
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you can convert that, pay the
taxes now, convert that to a Roth.
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Now, historically,
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taxes are pretty low right now and so
it's a good time to look at doing that
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anyway, even if the SECURE
Act hadn't recently passed.
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The other strategy that I think makes a
lot more sense because you're not paying
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taxes on those conversions,
is looking seriously at Roth
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401k or Roth IRA contributions.
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But I specifically want to emphasize the
Roth 401k contributions because if you
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have access to a 401k
plan through your work,
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there's a decent chance that there's
a Roth option attached to that.
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And if you are over 50,
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you can put a substantial amount of
money into a Roth 401k every year.
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I believe it's, Oh gosh,
uh, correct me if I'm wrong,
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but I think it's 25,000 for 2020
my brain is still on 2019 numbers.
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But if you are over 50,
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you should be able to contribute
$25,000 to your Roth 401k in 2020.
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And if you're going to work,
like, let's say you're 15,
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you're going to work for 15 more years,
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that's a substantial amount of money that
can be contributed and grow and not be
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taxed to later on that is
now inside of your Roth.
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So really big planning opportunity
that now exists with the Roth.
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If you have a large IRA balance and those
10 year distributions are likely going
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to create a pretty big tax fight
for your kids and just hand over,
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you know, half of your IRA
balance to uncle Sam through that.
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There are some additional
planning strategies beyond
the Roth that you may want
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to consider, but there are ways
that you can minimize taxes.
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There are ways you can set up trust,
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there are ways maybe you shuffle
around the beneficiaries,
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maybe you switch how you take the
distributions from your account. The
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conventional financial planning advice
around withdrawals and retirement is that
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you take out of taxable
accounts first and then you,
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once those are depleted and you have
to start taking those required minimum
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distributions from your IRAs, then
you take it out of those accounts.
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And then if those get depleted,
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then you take out of your tax free
accounts like your municipal bonds or your
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Roth IRAs. Well,
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it might make sense now because of
these new rules around the IRA stretch.
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Maybe it makes more sense to
preserve more of the taxable account,
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which is likely to be taxed at a lower
rate when it gets inherited by your
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beneficiaries and then deplete
more of the IRA account.
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Now again,
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this isn't like a blanket recommendation
because it depends on the account types
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that you have, the account
sizes, your income,
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there's so many factors including
like what state you live into.
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So you really do need to talk to your
tax advisor and your estate planning
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opportunity to see if the new change
of the law with the stretch or the
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inherited IRA is going
to have an impact on you.
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And if there are planning strategies
that you can undertake in order to make
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sure that you are being as efficient as
possible with those hard earned dollars
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and not handing half of them over to
uncle Sam when your heirs start taking
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those distributions. So I hope that
was helpful. If you liked this video,
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if you found it helpful,
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consider subscribing where we put out
new videos multiple times a month.
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Almost every week we're
putting up new videos,
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all centered around retirement planning
and exit planning for business owners.
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Thank you so much for watching.
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My name is Ashley Micciche
and I will see you next time.
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